The Companies Act 2006 (CA 2006) sets out the criteria to determine whether an entity can take advantage of the small companies regime when preparing its annual reports and accounts. The criteria is based on:

• qualitative factors used to establish whether a company is excluded from the regime (‘ineligible’) because of its nature or because it is a member of an ineligible group; and

• quantitative factors which require the entity to qualify based on size-thresholds.

Micro-entities are a sub-category of small companies, with additional criteria that must be met. For more information on whether an entity qualifies for the micro-entities regime, visit:

• Entitlement to the micro-entities regime

Key steps to determine whether a company is entitled to the small companies regime

The key steps to determine whether a company is entitled to the small companies regime are as follows:

Determine eligibility by reference to qualitative criteria:

• Is the company ineligible due to the nature of its business?
• Is the company a member of an ineligible group?

Determine qualification by reference to size thresholds:

• If the company is a parent company, does the group headed by it qualify as a small group?
• Does the company meet the size criteria?

Each of these steps are considered in greater detail below.

Is the company ‘ineligible’?

As per section 384 of CA 2006, a company will be ineligible for the small companies regime if at any time during the financial year to which the accounts relate the company was:

• a public company (plc) (even an unquoted or privately held one).
• an authorised insurance company
• a banking company
• an e-money issuer
• a Markets in Financial Instruments Directive (MiFiD) investment firm
• an Undertakings for Collective Investment in Transferable Securities (UCITS) management company
• a company that carries on insurance market activity
• a scheme funder of a Master Trust scheme within the meanings given by s391(1) of the Pension Schemes Act 2017.

Is the company a member of an ineligible group?

A company will be ineligible for the small companies regime if it was a member of an ineligible group at any time during the financial year to which the accounts relate.

An ineligible group is a group if any of its members is (CA 2006 s384):

• a traded company
• a body corporate other than a company under CA 2006 (eg, a company incorporated overseas) whose shares are admitted to trading on a UK regulated market (Note: for accounting periods beginning before 1 January 2021 substitute ‘regulated market in an EEA state’ for ‘UK regulated market’.) 
• a person (other than a small company) who has permission under Part 4A Financial Services and Markets Act 2000, to carry on a regulated activity
• an e-money issuer
• a person who carries on insurance market activity
• a scheme funder of a Master Trust scheme within the meanings given by s391(1) of the Pension Schemes Act 2017
• a small company (a company that qualified as small by application of the size limits in relation to its last financial year ending on or before the end of the year to which the accounts relate) that is:
  • an authorised insurance company
  • a banking company
  • a MiFiD investment firm
  • a UCITS management company.

The entire group, including any intermediate and ultimate parent companies and fellow subsidiaries, whether UK or overseas, needs to be considered.

If the company is a parent company, does the group headed by it qualify as small?

A parent company can only qualify as a small company for the purposes of its individual accounts if the group headed by it qualifies as small.

In its first financial year a group qualifies as small if it meets the size limits in that financial year.

In any subsequent financial year, it will qualify on what is sometimes called the two-year rolling basis. This requires the group to meet the size limits for two consecutive years to qualify as small.

If the group fails to meet the size limits for two consecutive years, it will not qualify as small in the second year.

Only the group headed by the parent company seeking to take advantage of the small companies regime needs to be considered (ie, if the parent itself is a subsidiary, it is not necessary to consider any larger group of which it is part).

Small groups – size criteria

The government has published new legislation, effective from 6 April 2025, to increase the monetary size thresholds that determine whether a group is entitled to the regimes for micro, small and medium-sized entities. The table below sets out the new size thresholds that apply for accounting periods commencing on or after 6 April 2025 alongside the previous thresholds. The size limits are met for a financial year if two out of the three of the following thresholds are met (aggregating the relevant figures for each member of the group) (CA 2006 s383):

Gross means before any consolidation adjustments and set-offs; net means after such adjustments. An entity is permitted to assess one of the limits on a gross basis and another on a net basis.

The turnover limit is adjusted proportionately if the financial year is longer or shorter than twelve months.

Balance sheet total means the aggregate of the amounts shown as assets in the company's balance sheet.

Does an individual company qualify as small by application of the size limits?

The method to determine whether an individual company qualifies as small by reference to the size limits is the same as that set out above but with a single set of thresholds.

In its first financial year a company qualifies as a small company if it meets the size limits in that financial year.

In any subsequent year, it will qualify on what is sometimes called the two-year rolling basis. This requires the company to meet the size limits for two consecutive years to qualify as small. If the company fails to meet the size limits for two consecutive years, it will not qualify as small in the second year.

Individual company – size criteria

As mentioned above, the government has published new legislation, effective from 6 April 2025, to increase the monetary size thresholds that determine whether a company is entitled to the regimes for micro, small and medium-sized entities. The table below sets out the new size thresholds for small entities that apply for accounting periods commencing on or after 6 April 2025 alongside the previous thresholds. The size limits for an individual company are met for a financial year if two out of the three of the following thresholds are met (CA 2006 s382):

The turnover limit is adjusted proportionately if the financial year is longer or shorter than twelve months.

Balance sheet total means the aggregate of the amounts shown as assets in the company's balance sheet.

For further information about the assessment as to whether a company or group qualifies as small by law, visit the helpsheet:

• Is a company or group small?

For more in-depth analysis of the simplifications and options available to a small entity when preparing and filing UK GAAP accounts, read the factsheet:

• Preparing and filing UK small entity accounts